Lessons from angel investment

Do a due diligence on the CEO and also do not invest in companies were decisions are made at the Sunday dinner table.

I have just come out of my very first investment as a business angel. It was by no mean a great exit. I have learned a lot and got a few key-learnings, that I will bring with me forever.

Background

I love to see ideas become reality, I love to see things grow and mature. When I realized I didn’t actually do that much about it except running my own businesses I decided to do some angel investments. I have not done many, but a handful.
From today I am no longer involved in the first investment I made as an business angel, and here are my experiences and learnings.

Gut feeling

I usually go on my gut feeling when it comes to business. I usually have a strong sense if a business arrangement is good or bad. With this company I had a really good feeling about the business. It was pure innovation, by an experienced team and on top of that doing good things for the world and the environment. What could go wrong?

Is the CEO really a good CEO?

As this was my first investment I relied completely on my gut-feeling about the product. What I completely missed was to take the pulse on the CEO and majority share-holder. Was he a good leader, did he communicate, did he have a sense for business, did he know how to raise money (the right money) etc etc.

I didn’t do this. Naturally not many CEOs are perfect, but as the journey started I realized that almost none of the usual pre-requisites was in order. Great visionary CEO with huge product knowledge, confirmed, but what about all the other skills? This was the perfect case when I would really would have loved to see the mail with the subject:

Looking for a new CEO to successful and innovative startup

…with content that elaborates and describes that ‘as the founder and current CEO I know my strengths and weaknesses and at the stage the company is in, we need a new kind of leadership as I love to work with the product and I will continue to lead product instead, so therefore I am now looking for my replacement as the CEO’

During the time of my participation in this startup I have actually got several of those e-mails and above is actually copied from one of them. This CEO is a fantastic product guy and visionary thinker in the space of the company, but he is not a leader nor a businessman….and maybe most important, he does not take advise or listen to those who have been around the block a couple of times when it comes to these topics. He is the typical ‘I am an engineer and I know everything’.
I completely missed this when I invested. That is a real key learning for me.

Family companies

Do not invest in companies where decisions are made around the Sunday dinner-table.
The second thing I completely missed was that approximately 80% of the company is controlled by father and son. I did not miss the fact naturally, but I missed the implications it had.
I would not advice anyone to invest in a company with that structure in a family and friends / seed level.

In this case it is not that much the individuals, but the fact that it is father and son who controls the company. It is just not an entirely good thing for an external investor.
At a later stage I imagine that this problem might be of less impact, but in the early stages it is definitely not ideal in any way.

To be very clear. This section is not in anyway personal related to this company, but solely a conclusion. It is only a result of the situation, no matter which family it would have been. All involved here did the best they could about this situation, but with 80% of the company gathered at the Sunday dinner table, well it becomes quite natural.

Conclusion

I am both happy and saddened about this investment. I am happy to have learned so much from this. Things I will take with me forever. My due diligence in all my future investment will be much more thorough when it comes to the people involved. Everyone have said it, but I ignored, now I learnt this the hard way.

In the terms of the company I reference to I hope they will make it, it is still a great product and their vision is fantastic. It could still be a great journey, but a new CEO could help accelerate that journey.

I am sincerely humble when it comes to my own wrong doings so this post is mainly to highlight what I did wrong, not how others behaved. These are my key learnings from my very first angel investment. I will bring this with me forever, in some ways a thank you might even be in place.